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Top 10 Reasons for Chinas Economic Growth

Written by Top 100 Arena on 2012-06-12
Since the global economic crisis in 2008, the Chinese economy has grown an impressive 40% while the U.S economy has grown only a miniscule 0.5%. For the past 20 years, economists have forecast the demise of Chinese economy and crash of its equity market. And every year, they have been wrong. Analysts predict that the Chinese economy will reach around $122 trillion in 2040, which is nearly three times the GDP of the entire world in year 2000. Per capita income will be at $85,000, which is more than twice the forecast for EU and a lot higher than that of India and Japan. In other words, the Chian's share in global GDP will be 40% in 30 years from now, dwarfing that of the U.S which will be 14 percent. 
What, precisely, are the reasons for China's economic growth? In order to fully comprehend the possible future economic hegemony, we will look at top 10 main reasons to establish a better understanding.

1 Undervalued Currency

In order to promote economic growth, the Chinese government has kept the Yuan undervalued, making Chinese exports more competitive than that of other countries and helping the exporting sector. Interest rates are kept relatively low, encouraging loans to foster new businesses. 

2 Cheap Labour

China is known for its massive workforce available for work at low wages. In the rural areas, many farmers struggle to make a decent income. As a result, there have been surges of immigrants from north moving to south and work in manufacturing plants for low but stable wages. Despite high growth, wages in China have remained low due to massive population in rural areas ready to work in factories. Because of this, exports from China have continued to be very competitive. More Info

3 Education

Education is very important in the well-being of every nations. China is making enormous investments in its education sectors, from primary to tertiary level. This is the move to drive China towards knowledge-base economy as educated population means more productive skilled workforce. Due to the investments made by the government, enrolments in China's colleges and universities have increased tremendously since 1998. At this rate, in the next decade, China's high school enrollment rate will be in the neighborhood of 100% and the college rate will be around 50%. These growths in higher education will also add more than 6% to the China's annual GNP. More Info

4 Foreign Investments

Being one of the largest players in the world's supply chain, China has received tremendous amount of foreign investments from hundreds of other countries around the world. This fuels knowledge, skills, and technology transfer, and in turn significantly increases the productivity.

5 Growing Middle-Class Population

China has a long-repressed consumerist tendencies, especially among the middle-class. With the per capita income rising in China, it is perhaps one of the most capitalist country in the world now. In the big urban cities, living standards and income are at what the World Bank deems "high middle-income". The growing middle class population has a clear, and increasing affinity for acquiring apparel, electronics, fast food, automobiles - all from international brands. As such an increasing domestic consumption is critical to the economy, the Chinese government has a host of domestic policies to increase the Chinese appetite for materialistic lifestyle.

6 Government's Domestic Investments

The Chinese government investment strategy is on fixed infrastructure and manufacturing capabilities. Because of this, everyone in China benefit since these investments help private sectors flourish by increasing employments which lead to increase in consumer spending and development of new businesses. 

7 Role of Rural Sector

Changes in the rural areas of China are an underappreciated economic engine. When analysts analyze economic growth, they usually divide an economy into three main sectors: services, agriculture, and industry. Over the past quarter-century, labor activity growth in China has been high in each of those sectors. However, services and industry sectors receive most attention from analysts since the level of output and changes have been so much higher in that two sectors. However, agriculture in rural areas cannot be totally ignored. Developments in technology and skill transfers from foreign investments have a positive impact on productivity in agriculture sector. Around 700 million people, or about 55% of population in China, are still living in the countryside. In fact, the rural sector makes up for about a third of China's economic growth today. More info

8 Sufficiently Large State Sector

Private sector in China is very vibrant and growing rapidly. However, Chia also has a large state sector and a nationalized core banking system, which are sufficient enough to directly set the overall investment level in the economy. In the US economy, investment can be very low because it is all from private sector, and there is no mechanism to ensure that huge funds are available for investments. However, in China, if private sector is not making directly investments, then the state will step in and invest. Thus, there is no investment decline, unlike the US. When the economy is booming, and companies are using their funds for investment, then the state will step back and reduces its investment in order to cool overheating.

9 Government Policy

Many Western nations criticize China on its political system and government. It is true that there are a lot about democracy China could learn from U.S and European Union, but there are so many things Western countries can learn from China too. When there are signs of economic problem in China, the government is able to move quickly. We are not saying Western countries should move towards one-party system, but when Western politicians are busy squabbling over too much political and ideological issues, the Chinese government is building a system that can cool down their economy when it is overheating, or heat it up when things cool down. Instead of fearing over budget deficit, the Chinese government make investments in infrastructures which in turn create jobs and keep the economy from slowing down. Instead of classifying the costs as expenditure, the government would classify them as investments, so there is no increase in deficit. More info on Forbes

10 Special Economic Zones

The role of these Special Economic Zones (SEZs) in China cannot be treated lightly as they triggered massive economic growth since the economic reform in 1979. These SEZs such as export processing zones, free trade zones, high-tech zones and many others enjoy special tax incentives, good infrastructure, special economic policies and flexible government measures. More Info

There are many factors at play when it comes to a nation's economy. China still has issues with managing macroeconomic policies since they cannot always predict how the world's economy will be. However, it is undeniable that at this rate the China's economy will continue to grow strongly, and remain the fastest growing major economy in the world.

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